Op-Ed: A Digital Dollar Would Help the U.S. and Its Allies Keep China in Check

• Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell hinted this week that a digital dollar is a high-priority project for the U.S.
• China has ramped up efforts for a digital yuan to undermine the dollar and extend its influence.
• The benefits for Beijing would be considerable if the U.S. cedes ground in financial technological innovation and the dollar's global dominance wanes.

Chinese officials have made no secret that their greatly accelerated efforts at introducing and distributing the digital yuan are an opening move in their long-term strategy to undermine the dollar's global supremacy and expand their influence.

Despite that, leading U.S. financial officials have rolled their eyes at any suggestion that deeper dangers lurk for the dollar, and thus also for U.S. national security, in the global digital currency race. Even as China marches forward and bitcoin's value reaches $1 trillion, the Federal Reserve had been in no hurry to be a contestant.

Until now.

This week marked a public turning point for the most significant U.S. government officials engaged in international finance — Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell. Josh Lipsky, director of the Atlantic Council's GeoEconomic Center, tweeted that it marked "the firing of a starting gun."

At a New York Times event on Monday with Secretary Yellen, CNBC's Andrew Ross Sorkin prompted her most full-throated endorsement yet of a digital dollar, or Central Bank Digital Currency, or CBDC. Though Sorkin called Yellen's attention to an Atlantic Council survey with Harvard's Belfer Center, showing that 70 countries now have digital currency projects, Yellen's focus instead was on the domestic good a digital dollar could do Americans.

"I think it makes sense for central banks to be looking at it," said Yellen, in a historic snippet on snapchat.

"I gather that people at the Federal Reserve Bank of Boston are working with researchers at MIT to study the properties of it. We do have a problem with financial inclusion. Too many Americans really don't have access to easy payment systems and bank accounts. This is something that a digital dollar, a central bank digital currency, could help with. I think it could result in faster, safer and cheaper payments."

In congressional testimony a day later, Fed Chair Powell also broke new ground, calling the digital dollar "a high priority project for us." He added, "We are committed to solving the technology problems, and consulting very broadly with the public and very transparently with all interested constituencies whether we should do this."

Yet while the Fed consults, China executes.

Neither Yellen nor Powell mentioned China's growing lead in digital currency development, yet that was the context. Their call-to-action coincides with China's announcement earlier this month of a significant partnership with the cross-border payment system SWIFT, removing all doubt that Beijing intends to internationalize the digital yuan.

At the same time, China has concluded a free trade agreement, or FTA, with Mauritius, its first with an African state, in a deal that is designed to create a digital financial testing ground. "As China evolves its digital currency plans, it may ultimately be Mauritius that leads in this area for Africa," write experts Lauren Johnston and Marc Lanteigne for the World Economic Forum. The FTA agrees to promote "the development of a Renminbi clearing and settlement facility in the territory of Mauritius."

This all comes as Beijing authorities took advantage of Chinese New Year celebrations on Feb. 12 to deploy three large-scale pilot projects to distribute digital yuan worth roughly $1.5 million in "red packets" of about $30 value each. Then this week, China expanded its testing program of digital currency handouts to the city of Chengdu, the capital of Sichuan province and the fifth most populous city in the country, where it is distributing some $6 million in digital yuan.

China's ambition appears being to lay the groundwork now for digital yuan's coming out party at the end of 2022 at the XXIV Olympic Winter Games in Beijing. The speculation is that Chinese organizers might require that all attendees and athletes download an app that would ensure all their payments at the games for hotels, tickets, food, souvenirs, and more are conducted in its new, digital currency. Even if one does not experience a physical boycott of China's Olympic games, watch for digital boycotts by the U.S. and other teams.     

It is hard not to compare China's current lead in digital currency development, shrugged off by American officials until now, to its early global lead in developing the 5G, or fifth generation, broadband cellular technology standard. Until the Trump administration responded alongside Western manufacturers, no one could compete with Chinese 5G providers and equipment manufacturers globally, most dominant among them being Huawei.

China's consistent prioritization of technological advance underscores its recognition that in history the country that has taken the technological high ground in its era has most often also been the dominant international actor.

If the U.S. loses the high ground of financial technological innovation, combined with a weakening of the dollar's global dominance, the benefits for Beijing would be considerable.

China's different approach to privacy provides it a competitive advantage. The U.S. and European need to satisfy privacy concerns will complicate CBDC development. Conversely, Beijing sees the digital yuan as a way to further strengthen its already formidable surveillance state, while also improving its ability to combat money-laundering, corruption, and terrorist financing. 

In a newly released paper published by CNAS, authors Yaya J. Fanusie and Emily Jin capture how deeply China understands the geopolitical importance of their digital currency project. They relate how Yao Qian, the former head of the People's Bank of China's Digital Currency Research, compared his country's digital currency progress to previous Chinese advances in robotics, big data, and artificial intelligence.

Speaking before a United Nations information technology conference, "Yao posited digital currency as part of 'the Next War,'" write the authors, referring to an article of that title in the Economist that discussed technology's central role in U.S.-China competition.

The Fed worries about being too hasty in introducing a digital dollar, given the stakes as the world's reserve currency. The greater geopolitical danger, however, is how quickly it is falling behind.

The U.S. can still win this contest if it not only quickly develops a digital dollar, but collaborates on the creation of a digital euro, a digital pound, and a digital yen. The total firepower of these currencies would close the innovation gap quickly.  It would also demonstrate the value of working with allies, a centerpiece of Biden foreign policy.

Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States' most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper's European edition. His latest book – "Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth" – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week's top stories and trends.

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